In this article I report on my examination of the safety rating provided by Value Line (VL) to screen for the financial safety of stocks I'm considering for a dividend growth portfolio. VL provides investment research for stocks, mutual funds and ETFs.
My Dividend Growth Investing History
The dividend growth portfolio that I've been developing for 15 months is in a qualified tax plan with a minimum required distributions (NASDAQ:MRD) beginning in 2014. My plan is to meet the MRD (~4%) from the dividends I receive.
I have developed a strategy for my dividend growth portfolio similar to others specified in Seeking Alpha articles. For example, I use the Dave Fish's Dividend Champions, Contenders and Challengers List (CCC list) to identify dividend growth candidates. Other lists that I've used are Carnevale's Super 29 Index, Power 25, and Safe Havens lists, and the 30 Dow Jones industrials. The lists that I did not hyperlink can be found by author and key word searches on Seeking Alpha.
My focus has been on high current yield and high growth of yield. Of course quality is important and I use measures of dividend coverage to estimate the companies' continued ability to pay an increasing dividend. Also, stocks I've considered must have outperformed the S&P 500 during the latest one or two (2008, 2002) recessions. These measures are subjective and require discipline on my part to establish dividend-to-earnings ratios and time periods to compare prior performance. I find that I change the rules in subsequent months as I examine my holdings or consider new stocks for inclusion into the portfolio.
Another Measure of Quality
As another test for quality, I'm drawn to a simple measure specified by Chowder. Chowder (Instablog) states that "Financial strength is the key requirement in the stock selection process." Looking at VL ratings, Chowder requires a 1 or 2 rating for safety. The VL financial rating must be B+ or better. VL's safety ranking ranges from 1 (highest) to 5 (lowest).
To understand the utility of this simple rule and to test the quality of my dividend growth portfolio, I examined the safety ranking, price stability index and financial strength rating for each the stocks tracked by VL that are on the June 28, 2013 version of the CCC list. Going in, I know by reading the Terms and Conditions that "VL provides all content as is, without warranties of any kind." So, I'll continue my due diligence because "under no circumstances shall VL be liable for any damages from my use of the site content."
Of the 468 stocks on the CCC list, 178 (or 38 percent) meet Chowder's requirement of a 1 or 2 rating for safety. These same 178 stocks also have a VL financial rating of B+ or better, so they can all be considered further, based on Chowder's guidance. Of the 468 CCC stocks, 137 stocks (29 percent) have a low safety rating (a rating of 3 or greater), and would be disqualified by this simple measure of quality from further consideration. The remaining 153 (or 33 percent) are not rated by VL.
The following Table exhibits the VL safety rating of the 16 Dow Jones Industrial stocks that are on the CCC list. These ratings are available to all readers at the (Value Line) website.
|Safety Rating||Dow Jones Industrial Stocks (by Symbol) from the CCC List|
|1||CVX, IBM, INTC, JNJ, KO, MCD, MMM, MSFT, PG, T, TRV, UTX, VZ, WMT, XOM|
|4 or 5||None|
The following Table lists the 153 stocks (by symbol) on the CCC list that are not rated by VL. These tend to be the smaller capitalized companies on the CCC list. Many of these companies may be financially safe; they are just not ranked by VL.
ACU, AEL, AFG, AFSI, AHGP, AMNF, ANDE, APU, AROW, ARTNA, ASEI, ATRI, AUBN, BANF, BBL, BDMS, BIP, BKUT, BMRC, BR, BWL.A, CAE, CAG, CASS, CBU, CCFN, CHL, CMLP, CNSWF, CPK, CPKF, CSVI, CTBI, CZFS, DCM, DFZ, DGAS, DGICA, DGICB, DPM, DX, EBMT, EBTC, EEP, EFSI, ELS, ENB, ENSG, ESS, ETE, EVEP, EVR, EXLP, FKYS, FLIC, FMAO, FMCB, FRFC, FRS, GEL, GOLD, HCBC, HEP, HIFS, HONT, HTCO, HWKN, IMASF, IPCC, JCS, JUVF, LARK, LSTR, LYBC, MDNB, MGRC, MHLD, MKTX, MLAB, MOCO, MPR, MYBF, NATL, NC, NGLS, NHC, NHI, NIDB, NKSH, NMM, NNN, NS, NSH, NTT, NUE, NWFL, OCBI, ODC, OHI, OKS, ORIT, OZRK, PB, PDER, PNNT, PSBQ, RAVN, RBCAA, RCI, RGLD, ROL, RSG, SBSI, SCL, SEP, SFG, SHPG, SJR, SKT, SNH, SNN, SPAN, SRCE, SU, SXL, SYT, TCAP, TCP, TGH, TGP, THFF, THVB, TLP, TMP, TOO, TPL, TRI, TSH, UBA, UBNK, UBSI, UG, UHT, UMBF, UTMD, VGR, VNR, VSEC, WABC, WES, WEYS, WFIFF, WHG
Observations I take from my examination are the following: first, many dividend paying stocks meet the Chowder criteria for safety, and financial strength. The criteria are not overly restrictive and will be part of my screens for dividend growth stocks going forward. Secondly, the CCC list represents a group of financially strong stocks, overall. Only 2 of the CCC listed stocks have ratings of 4 (bad; none have a rating of 5). The CCC list exhibits a strong bias toward financial safety. Stocks that have a history of dividend payment and growth trend to be financially safe. Thirdly, and importantly, 290 of the 468 stocks (62 percent) on the CCC list do not meet the VL 1 or 2 safety rating criteria or are unrated. Therefore, the majority of stocks on the CCC list cannot be qualified for safety, based on the VL rating.
The safety of 153 stocks not rated by VL (and listed in the Table) are unknown to me. Many of these stocks may be very financially safe stocks and worthy of continued consideration. Perhaps an S&P rating of BBB+ or better could be used to screen some of the unrated stocks as suggested by Chowder.
Examining my current portfolio, three of my holdings on the CCC list (BHP Billiton [[BHP]], Caterpillar [[CAT]], National Oilwell Varco [[NOV]]) do not meet the VL 1+2 criteria. These three stocks exhibit respectable payout ratios, and two (BHP, CAT) exhibit good dividend growth. I will look further into their financial strength.
I hold two stocks (Shaw Communications [[SJR]], Triangle Capital [[TCAP]]) on the CCC list that are not rated by VL. The financial state of SJR looks strong and rates high safety, in my estimation. TCAP exhibits a low free board on dividend coverage and warrants that I review this holding.
Safety ratings, as suggested by Chowder, provide an effective and simple screen for financial safety. Many stocks meet this rating. I will use the rating for my dividend growth investing. I also know that many attractive dividend-payer and dividend-growth stocks are not rated. So, I will still rely on my assessment of earnings, historically good performance, etc., to identify high quality companies. If I'm successful, these companies will be financially strong, having low debt and strong cash flow.
Disclosure: I am long BHP, CAT, NOV, SJR, TCAP, CVX, IBM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.